Wednesday, December 21, 2011

Next segment in our Leasing Series…First Right to Acquire Adjoining Space.

The concept of a Tenant having a ‘First Right’ to lease adjoining space, is often provided for in a standard lease agreement. The benefit to the Tenant is obvious, as it gives them first option on the space should it come available during the term and allows for premises to expand into. Typically the clause can be worded in one of two ways ---
i) the Tenant does not have to act on the space, until a 3rd party offer to lease comes forward – meaning they may be able to buy time during a vacant period.
ii) the Tenant receives notice immediately upon the space becoming vacant.

Landlords normally do not prefer the first option, as they have to engage a 3rd party tenant prospect on the space, serve notice, and wait the period out before knowing which party is taking the space. The 3rd party tenant does not normally care for this delay in learning whether or not they can proceed, given costs incurred in considering the premises (ie. drafting offer proposals, doing due diligence etc.). It can be rationalized as a cost of doing business with the initial Tenant, if at the end of the day it allows them to expand – which is ultimately good for the Landlord.

The second option simplifies the entire requirement, in that the Tenant receives notice immediately upon the space becoming available, or based on a set date at which it will become vacant. This can then allow a Landlord to offer it over to the adjoining tenant immediately upon it becoming available, and prior to having to market it.

As for notice periods, as with everything in commercial leasing, it is subject to negotiation and conditions in your particular market. Typically 1 week to 10 days would be deemed reasonable, with shorter periods favouring Landlords and longer periods favouring Tenants.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in negotiating the appropriate terms on the ‘First Right’ provision within your lease.

Thursday, December 15, 2011

Generally all lease agreements have renewal options built-in to the initial lease. Both tenant and landlord effectively agree on the basics of a renewal term, with respect to a new term for the space. Beyond the actual duration of the renewal term – other items which may be included would include; the lease rate itself (or some sort of ceiling on a percentage basis) and the notice period for exercising the renewal.

The term and notice period are generally easy to agree on. Where things get more complicated is on the rate itself or a ceiling. Tenants will argue that they do not wish to see a substantial increase in the base rent, as they move into the next term. Landlords will rightfully point out, that they should not be forced to fix base rental amounts, as there is no commitment to remain in the space beyond the initial term. This matter then becomes a very much negotiated term of the deal, and both sides need to determine how forceful a position they need to take.

If the parties cannot agree, depending on the jurisdiction, an Arbitration Process is a practical solution for all concerned. It effectively allows a 3rd party to determine the rate if the parties cannot come to an agreement at the time of renewal. Arbitration can be used for other reasons, but most often it applies when the parties cannot come to an agreement on dollars, with differing views of market rates. There are definite costs to pursue this line of resolution for both sides, so it is best to review them prior to filing for it.

Again, seek out experienced commercial realtors with solid leasing backgrounds in your market to assist you in negotiating the right renewal terms for your purposes.

Tuesday, December 6, 2011

This concept is often times misunderstood by Tenants - that is the idea that LEASABLE SPACE DIFFERS FROM USABLE. Typically this is the case whether we are talking about a freestanding building (for one occupant)or multi-tenanted commercial complex.

In a single user tenancy within a freestanding building, the entire building envelope becomes the leasable amount. For instance, if the building dimensions based on a perimeter measurement are 25’ x 100’, its leasable area is deemed to be 2500’. But if you actually calculate the floor area which you can actually stand on (or use), it is less by the width of the wall sections on all 4 sides. Depending on the building’s construction, this can make for a reduction of 100’-150’.

In the case of a multi-tenant complex, the above determination becomes a bit more complicated. The term ‘common area factor’ comes into play, and it refers to an add-on for shared spaces on a single floor or within a building entirely. These spaces would include lobbies, bathrooms, hallways, and utility closets. It can add as much as 8-12 percent, depending on the extent and size of the common areas within the building. Again, the reality is that the Tenant pays for a percentage of space, above and beyond the actual usable floor area within their actual unit.

In terms of an acceptable measurement standard, one of the most widely used is the BOMA Standard, which is well recognized throughout the commercial real estate world. If used, it becomes the official square footage measuring tool and certifies both the ‘leasable’and ‘usable' square footage for the premises.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in determining ‘leasable vs. usable’ considerations, as well as ‘common area factors’ which may apply in your property search.

Search This Blog

Mark and Russel Lalovich

Lalovich Real Estate

Top producing Commercial Real Estate team in Windsor, Ontario. Please contact us for more info about our services by phone 519-966-0444, by email at russel@lalovichrealestate.com or visit our website at www.lalovichrealestate.com.

Follow by Email

Thanks for reading. We'd love to hear from you. If you have any feedback/questions or would like to request a topic for a future post, please comment on the blog. Everything we do is based on referrals, so if you enjoy reading our blog posts, please forward this to someone who may be in need of our commercial real estate services.